Holt 7525-9 S15_IT

Socialist vision: 1.

Socialist vision: 1. Private property is economically and politically harmful. In a market economy, some people will be more successful in accumulating private property than others. Inevitably, the private property will come to be concentrated in the hands of a few. This control of private property allows the few (the rich) to dominate politically and economically, to the disadvantage of the masses. Instead of private property ownership, most resources should be owned (or heavily regulated) by the government to ensure that they are used to benefit the general public. 2. Market prices are often manipulated by powerful businesses. Big businesses often face few competitors and may cooperate with their competitors to manipulate prices and consumer demand. The government should be willing to use price controls to ensure that prices are fair for all. 3. Government promotes the best interests of the general public. Government protects the masses from exploitation by the rich and by the big businesses that the rich control. Government should be large and strong enough to protect the weak from the powerful. The U.S., like other countries, uses an economic system that is a mixture of capitalism and socialism. Most economic decisions in the U.S. are made through the use of markets. Three Economic Questions The basic economic problem is scarcity. Human wants are unlimited. Resources are limited. Scarcity forces every society to answer three questions concerning the allocation of resources and goods. The three questions, and how they are answered in a market economy, are detailed below: 1. What to produce? This is determined in a market economy by consumer demand. If there is a stronger consumer demand for candy bars than for rice cakes, then more candy bars will be produced than rice cakes. Is this the best way to determine what to produce? Generally, it is. Remember that the basic goal in dealing with the problem of scarcity is to produce as much consumer satisfaction as possible with the limited resources available. The best judge of any consumer’s satisfaction is generally assumed to be that consumer. If consumers buy more candy bars than rice cakes, then consumers must be getting more satisfaction from candy bars than from rice cakes. 2. How to produce? This is determined in a market economy by the least cost method of production. Producers desire maximum profit. This means that they will try to satisfy consumer demand at the lowest possible cost of production. Example 10: Motor Trend magazine reported in April, 2012 that Ford is installing 88 robots in its Louisville plant’s paint shop. “The machines apply paint to the exterior and sealer inside the body more efficiently, reducing energy costs.” Is this the best way to determine how to produce? Generally, it is. To produce as much consumer satisfaction as possible with the limited resources available requires that everything be produced with as few resources as possible (at the lowest opportunity cost). Example 11: The Bagelry employs Tanisha, a teenager, to slice their fresh-baked bagels. Why does the Bagelry employ a teenager instead of, say, a surgeon? A surgeon could do a more precise job of slicing the bagels. But the teenager can do an adequate job and the teenager’s labor costs less. The low-cost labor will contribute to the firm’s goal of profit-maximization. Employing a teenager for this job instead of employing a surgeon will also serve the best interest of society. Society would not want to employ a surgeon’s labor to slice bagels. The surgeon’s labor is much more valuable to society when employed to perform surgery. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Trade and Economic Systems 2 - 6

3. For whom to produce? This is determined in a market economy by the distribution of income. The distribution of income is determined by the markets for resources. If a person owns resources that are highly valued in the marketplace, that person can receive a relatively large share of the income. If a person owns resources that are not so highly valued in the marketplace, that person can receive only a relatively small share of the income. Is this the best way to determine for whom to produce? It has two advantages and one disadvantage. One advantage is that resource owners have the incentive to develop their resources so that they will produce maximum consumer satisfaction. If a person, through education and training or through work experience, develops his or her human capital, that person will be able to earn a higher income. Example 12: Irina is a janitor. Janitorial labor is not highly valued in the marketplace. Irina attends college at night, eventually earning a degree in computer programming. Irina earns a much higher income as a computer programmer than she could as a janitor. Irina is more valuable to society (produces more consumer satisfaction) as a computer programmer than as a janitor. The other advantage is that resource owners have the incentive to direct their resources to their most valuable use. Example 13: If Frank has the skills to be either a gardener or an architect, and architects earn a higher income than gardeners, Frank will probably choose to be an architect. The disadvantage of having the distribution of income determined by the markets for resources is that the distribution of income may prove to be very unequal. An unequal distribution of income may mean that the goods and services produced do not generate the maximum consumer satisfaction possible with the limited resources available. Example 14: 50 coconuts are produced on Gilligan’s Island. The Howells consume 45 of the coconuts, and the other 5 coconuts are divided among the rest of the group. The 50 coconuts will yield a certain amount of consumer satisfaction distributed in this way. If the coconuts had been distributed more equally, they would probably yield more consumer satisfaction. The problem of unequal distribution of income is addressed in more detail in Chapter 31. Appendix: A Movement along a Curve versus a Shift in a Curve Graphs illustrate the relationship between two variables. When the value of one variable on a graph changes, the value of the other variable may also change. This is a movement along the curve illustrating the relationship between the two variables. Example 15A: Moe has a lawn mowing service. The table below and the graph on the next page show the relationship between the number of hours Moe works each day and the number of lawns he can mow. Hours Worked Lawns Mowed 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 FOR REVIEW ONLY - NOT FOR DISTRIBUTION 2 - 7 Trade and Economic Systems